Higher Level of Service: The Compilation, Review or Audit

Apr 28, 2015

Many companies are required to provide lenders or other outside parties financial statements prepared by independent certified public accountants. A higher level of service requires the CPA to spend more time preparing and completing the engagement and will in turn be more costly to the client. So what are the differences between the three levels or services: compilation, review or audit?

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Compilation

  • The most basic level of service that a CPA provides relative to a financial statement
  • The CPA firm provides management assistance in presenting financial statements without providing any assurance that there are no material modifications that should be made to the financials
  • The CPA must comply with the Standards for Accounting and Review Services (SSARSs) and should have an understanding of the industry in which the client operates, obtain knowledge from the client and read the financial statements to make sure they are free from obvious material errors
  •  The CPA does not perform any inquiries, analytical procedures, understands the client’s internal controls, assess fraud risk nor test accounting records
  • The accountant’s report associated with the compiled financial statements does notexpress an opinion or provide any assurance about whether the financial statements are in accordance with the applicable financial reporting framework

Review

  • A review says the accountant is not aware of any material modifications that should be made to the financial statements
  • A review consists of performing mostly inquiry and analytical procedures which will provide limited assurance that there are no material modifications that need to be made to the financial statements
  • During a review, the CPA required an understanding of the client’s industry and knowledge of the client, but still is not responsible for understanding the client’s internal controls, fraud risk, or test accounting records
  • The accountant’s report associated with the reviewed financial statements does not express an opinion, but does provide assurance that the financial statements are in accordance with the applicable financial reporting framework

Audit

  • This is the highest level of service that a CPA provides relative to a financial statement
  • An audit provides the user with the auditor’s opinion that the financial statements are presented in conformity with the applicable financial reporting framework
  • During an audit, the CPA is required to obtain an understanding of the entity’s internal controls and assess fraud risk
  • The CPA is required to obtain evidence to support the amounts and disclosures in the financial statements through inquiry, physical inspection, observation and third-party confirmations, examination of records and analytical procedures
  • The auditor’s report provides an opinion that the financial statements are presented fairly and the financial position of the company and results of operations are in conformity with the applicable financial reporting framework

By: Kristin Metzger, CPA

Categories: Audit & Accounting